2-Day Downturn and Hedge Fund Redmptions

Also via Yves Smith: Originally from Wall Street Journal.

Friday, November 7, 2008Hedgies Still Blowing Up the Markets, Oh My!

A front page story in the Wall Street Journal discusses how continued forced selling by hedge funds was the proximate cause of the sharp selloff of the last two days (um, the simply lousy economic news. such as lousy payrolls, horrific retail sales, no sales of credit card bonds in the last month, and similarly not-so-cheery news from overseas had nothing to do with it).

Deleveraging is destructive to asset prices. Some had hoped with the big credit default swap settlements October credit default swap settlements past (Freddie, Fannie, Lehman, WaMu) that the big impetus for hedge funds dumping assets would be largely past. We weren’t so certain. First, most hedge funds have quarterly redemptions, and their investors were expected to ask for their money back in large numbers, in many cases because performance has been bad, but others factor are that investors want to reduce risk and (quelle surprise!) may need the cash. I am told typical arrangements are that withdrawal notices are due by 45 days after the end of the quarter and payment is to be made no later than 45 days after that. And unless the funds are very heavily in cash (not likely given their return ambitions), they need to sell SOMETHING to pay investors back.

However, that pressure may not be as great as thought because some hedge funds are refusing or limiting redemptions. Why this does not fatally tarnish the entire concept is beyond me (I take honoring contractual agreements seriously), but All About Alpha tells us in “Stigma of redemption gates fading fast”: